Home foreclosures move up-market as discounting pushes prices down

A greater number of foreclosures are hitting the high-end real estate markets in 2009 as price discounting continues to throw more and more properties underwater. It's like a self-fulfilling prophecy: As some homeowners see their homes' values drop below the balances due on their mortgages, they give up trying to save their homes.

Zillow's chief economist, Stan Humphries, found that while high-end markets accounted for only 16 percent of foreclosures in 2006, by July 2009, 30 percent of foreclosures hit the top third of homes. "That means that top-tier homes make up almost twice the proportion of foreclosures as they did just three years ago," Humphries wrote on his blog.
Foreclosures are no longer a primarily subprime problem. While in 2006 about 55 percent of foreclosures came on subprime loans, in 2009 subprimes represent just 35 percent of foreclosures, another 35 percent are in the middle tier and 30 percent are in the top tier. The primary contributing factor is higher delinquency rates in Prime, Alt-A and Option ARM mortgage products.

• Loans are transitioning into delinquency/foreclosure at a rapid pace, but moving out at a slow pace;

• Cure rates are low. In other words, fewer people are paying their past-due amounts and getting back on track.

• Loans are taking longer to liquidate. In other words, the length of time between the start of the foreclosure process and the point when the lender gets control of the property is growing.

The Amherst Mortgage Insight report notes that there are currently 7 million homes in a shadow market -- homes that are either in delinquency or in foreclosure, but not yet on the market. This number translates into 135 percent of a year of existing home sales, which means that whatever numbers you're seeing now about homes sales, they don't truly reflect the storm that's yet to come.

In a related story, home buyers are still negotiating discounts on listed properties, and properties continue to list at lower and lower prices. Zillow found that buyers paid an average of 3 percent less than the listing price nationwide. In some markets, particularly coastal regions in Florida, buyers paid eight to nine percent less than listed prices. In addition to foreclosures, Florida's coastal properties have been hit hard because people can't get reasonably priced insurance for those properties. Many insurance companies have gotten out of the business of insuring on Florida's coasts thanks to the recent hurricanes. My home in Central Florida is currently insured by State Farm and it's not on the coast, but the company has already sent notices to customers that it plans to exit the Florida market completely.

Zillow has developed a chart breaking down price discounting by city metropolitan areas. Eight of the cities facing the highest discounting are in Florida. The city experiencing the highest percentage discounts is Vero Beach, Fla., at 8.9 percent or $20,974, followed by Naples, Fla., at 8 percent or $27,155. Outside of Florida, the two top cities are Atlantic City, N.J., at No. 6 with discounts of 7.2 percent or $21,532 below asking price. Morristown, Tenn., is at No. 8 with discounts of 6.9 percent or $12,118.

Stemming foreclosures is the key to getting back to a stabilized housing market, but these numbers don't look great. Yet the banks are not moving quickly to modify loans and keep people in their homes. The U.S. still has miles to go before we'll even be close to solving this crisis.

Lita Epstein has written more than 25 books, including The 250 Questions Everyone Should Ask About Buying a Foreclosure and The 250 Questions You Should Ask to Avoid Foreclosure.